Business Corpus: No Fed Rate Hike, But Here's Why The Dow Jones Can't Get A Head Of SteamThe Fed meeting ended with no rate hike, as expected, but stocks soon reversed lower. Higher interest rates, inflation and the dollar won't let the market snap out of its recent funk. The post No Fed Rate Hike, But Here's Why The Dow Jones Can't Get A Head Of Steam appeared first on Investor's Business Daily.

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The Fed meeting ended with no rate hike, as expected. The no news briefly boosted stocks, but they quickly reversed lower. Higher interest rates, inflation and the dollar won't let the Dow Jones and the broader stock market snap out of their recent funk.

Wall Street expected the Fed statement to recognize that the pickup in core inflation has suddenly brought it close to the 2% inflation target. The Commerce Department reported Monday that the core personal consumption expenditures price index, which excludes food and energy, rose 1.9% from a year ago in March.

"On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2%," the Fed statement said. The Fed also signaled it was willing to let inflation rise above 2%, stating that it's a "symmetric" target.

With no press conference or update of policymakers' economic projections, any hawkish or dovish shift won't be known until Fed meeting minutes come out on May 23.

Despite healthy earnings from Apple (AAPL), the Dow Jones industrial average and S&P 500 index were both close to the flat line just before the Fed meeting announcement, while the Nasdaq composite was barely higher. Apple is the largest component of the Dow Jones, S&P 500 and Nasdaq.

After the 2 p.m. ET announcement, the Nasdaq expanded modest gains, but only briefly. Heading into the close, the Nasdaq fell 0.4%. The Dow Jones and S&P 500, after briefly turning positive, fell 0.7%. All finished near session lows.

Investors won't get much of a reprieve from Fed rate-hike concerns. The Labor Department's April employment report out on Friday is expected to show that the jobless rate fell to 4.0% last month. Average hourly wage growth above the 2.7% expected also is a threat, with major employers like CVS Health (CVS), Target (TGT) and Starbucks (SBUX) announcing that wage hikes would take effect this spring.

Dollar Weighs On Dow Jones Stocks

The latest culprit for the sluggish stock market is the dollar. The U.S. dollar index hit a new high for the year on Wednesday, continuing its recent resurgence against other major currencies. The greenback's roughly 3% rise since the end of March will have a dampening effect on earnings for U.S. multinationals with broad international exposure like Dow Jones stocks Caterpillar (CAT), Boeing (BA) and Merck (MRK). Earnings in foreign currencies are worth less in dollar terms when the dollar strengthens.

The dollar's strength stems from the pickup in inflation and growing expectations that the Fed will hike rates four times this year. Meanwhile, central banks in Europe and Japan are in no rush to tighten. The widening gap between interest rates in the U.S. and overseas has made the dollar more of a draw.

Interest Rates Rising, Narrowing

Higher interest rates and inflation also could squeeze earnings in coming quarters. Higher interest rates also raise borrowing costs for consumers and businesses and can crimp the affordability of major purchases like autos and housing. Further, two-year Treasury yields have climbed more than 10-year yields, and the flatter yield curve pinches net interest margins for the likes of JPMorgan Chase (JPM) and Bank of America (BAC).

After the Fed meeting, the 10-year yield was at 2.972%, while the two-year was at 2.496%. Those were little changed, but the yield spread is near its lowest level in years.

Meanwhile, more companies are beginning to note profit-margin pressure from rising input costs, higher fuel and transportation costs, and rising wages.

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